Banks, Lenders & Investors Business Development & Marketing Finance General

Politicians’ ignorance can have a negative impact on the global economy

beware the influence of politicians on the global economyAs 2018 draws to a close it makes sense to look at macro-economic trends that might inform our view of the future.
Economies tend to move in cycles from positive to negative and this is true for both national and global economies.
However, while it is true that the cycles rarely match simultaneously in different parts of the world, clearly a downturn in one region can have knock-on effects in another, as was the case in the financial crisis of 2008.
For some time now, various bodies, such as the IMF, have been predicting that another major global recession is looming. Some are even predicting that the next crash will be worse than 2008.
This is partly because the accepted wisdom is that the cycle tends to be over a 10-year period, but it is also because there appear to be headwinds building up.
A snapshot of the current state of global confidence, the global ECM (Economic Confidence Model) from July this year suggests that the USA may be moving into a serious high in 2020 regarding liquid assets (non-fixed), while the rest of the world is heading in the opposite direction. The Dow Jones has been heading ever upwards, while the UK, European and Chinese markets seem to have peaked and are heading downwards. This also applies to currency values.
According to Richard Partington, a Guardian economics correspondent, the potential headwinds for 2019 include a plateau in global growth along with slower growth predicted for the US and China, plus both public and private debt around the world being at a record high. Added to these, he says, are the risks from Brexit and from the US Fed hiking interest rates.
This is where the politicians come in
Despite the 2008 crash, and the subsequent measures taken by Governments and Central Banks such as using quantitative easing and keeping interest rates low to stimulate economic activity and requiring banks hold more capital to avoid a repeat collapse, both Governments, and investors, still have faith in Government debt in the form of bonds and property on the basis that economies are stable and will continue to grow.
Both are deemed “safe” and property is used as collateral for more debt. Nevertheless, some economists argue that the restrictions now placed on foreign investment in property have actually had the effect of devaluing it and also damaging consumer confidence.
So, by this logic, policies such as those of US President Donald Trump’s “Make America Great Again”, that encourage investment to return to the US, and his threats of trade sanctions against those economies that are perceived as competition to the US economy are unlikely to help to stabilise the global economic situation and instead would build up the recessionary pressures in the rest of the world.
The UK Government, too, has been taking steps to deter foreign investment in property. Then there is the rise of various so-called “populist” movements across the world, such as in Italy, Turkey, Hungary and elsewhere, which again focus on national interest above all. Another danger, according to Partington, is victories for populist parties in the forthcoming EU parliamentary elections in May 2019. The mood would appear to be one of increasing restrictions on global trade.
Inevitably, in the event of another crash on the scale of 2008, or worse, such policies will come back to bite us all, not just the politicians. But then we did vote for them!

Banks, Lenders & Investors Finance General Turnaround

Can we rely on the US dollar for global financial stability?

Many of the world’s currencies rely on the US dollar as a world reserve currency to hold for their own stability.
But Alasdair Macleod,  head of research for GoldMoney, argues that action to protect the dollar by rapid monetary expansion since the Great Depression in 2008 has led to an excess of paper money representing $trillions in debt held by emerging markets, which use it as an international settlement medium.
He warns that this excess of money, which central banks control through interest rates, is now getting beyond this form of control.
The US needs to continue monetary expansion by printing more paper money and bank credit to avoid a depression in its own economy but this is likely to undermine confidence in the dollar as a global currency.
Macleod argues that this has increased the risks of global financial instability.
The problem is that there is a lack of appetite for borrowing by sound businesses due to subdued economic growth. This has also affected commodity prices, such as oil, steel and various minerals leaving the countries that produce them with unsustainable dollar debts.
It is a precarious situation and should there be some event, similar to the Bubble of the 1990s or a housing market crash, it is likely to lead to a loss of confidence in the dollar.
At that point people would be likely to dispose of dollars or spend them as quickly as possible in preference for ownership of goods.
The knock on effect would impact on the Japanese Yen, the Euro and Sterling and all the other currencies tied to the dollar, whereby they too would suffer.
The prospect of a global recession is not one anyone wants to talk about but it may be the elephant in the room.